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Generate Income Trade Options
Most short term stock traders, from day-traders to swing traders are completely unaware of a tendency that exists in the US markets, that is a tendency to close up or down depending on what day of the week it is! Believe it or not, the day of the week, has been statistically tested, and back-tested over 20years, the results are conclusive that the pattern does exist!
The Day of the Week Indicator is much more evident in up markets and sideways markets, and it doesn’t hold true during market declines!
The theory is simple, it says that there’s a tendency in the US markets to have at least one big rally day, usually a 3 digit gain, (for example Dow Jones rallying 150 points in a day) between Monday and Wednesday. Generally the first half of the week is considered most bullish, with Monday being the most bullish day of the week!
If the market fails to rally on Monday, then the next best day to have this 3 digit rally is on Tuesday, if it doesn’t rally on Tuesday either, then Wednesday will bring the rally. this is rare, not to have the rally by Wednesday, the most frequent scenario is to have the rally either on Monday or Tuesday, then we see a choppy, volatile Wednesday, and then comes Thursday which is the weakest day of the week! The market almost always declines on Thursdays, at least during the session if not through to the close, it’s that simple! Bullish on Monday and Tuesday and bearish on Thursday.
There’s however the possibility to have an inverted week, where markets remain flat to weak all the way from Monday to Wednesday, if that happens then it is almost certain that Thursday will act again as a counter trend day and will bring the big rally!
No certain patterns have been identified for Fridays, but usually after a typical Thursday sell off, the market will attempt to continue its rally on Friday, of course this whole theory is not a stand alone indicator, the day of the week indicator simply tells you to be suspicious and to be accordingly prepared for the early week rally and the Thursday sell off.
The day of the week indicator is very useful to day traders, now you know that after a strong half week, you don’t want to buy the early Thursday rally, usually a short lived rally or just a higher open that soon turns into a massive decline! Equally if the early half week was flat or weak, you don’t want to be a seller on Thursday, rather look to be a buyer, just for one day! And on Wednesdays, look out for volatile, choppy action, often low range days that are not worth the risk, and may get you stopped out a lot if you use tight stops! I have used the day of the week indicator together with the rest of my technical analysis, it has helped me time my entry and exit levels in my swing trading, much more accurately. This can save you a lot of unnecessary losses and increase your profits on the good trades!
This chart indicates a full 2 week trading period, (no holidays), notice how the market declined, both big days up were Thursdays! That is the Day of The Week factor in reverse use, (since the pattern still exists, the longer-term trend is still up!) That’s what I thought, and I was proved right on Monday, notice however how intimidating the last selling day is, after the second Thursday. The previous lows was breached, that’s why I always say, never place your stop below yesterdays low!
News and volatility
I mentioned in other articles that we should ignore the news altogether, however it is important to know that news causes volatility, it is impossible to interpret the news and predict market direction correctly! However the markets tend to trade flat the day before important economic data is to be released, such as GDP, Jobless Claims or CPI (Consumer price index, an inflation statistic), and then they trade very volatile on the release day! You see the Dow Jones up 100 points now, then 30 minutes later it may be trading 100 points lower!
So take this into account for your trading plan as day traders, and if trading on these days as day traders, either use accurate entries with tight stops, or use less accurate entries with much larger stops, news release days can be found in trading calendars, online.
The combination of news release on Thursday and today being Wednesday, is that today the markets will be very choppy, that’s an opportunity to fade gaps at the open. The market always fills such gaps throughout the day, as it reverts back to yesterday’s close! Then Thursday will be a big. either up or down day, depending on what the longer term trend is, and what the first half of the trading week was.
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